Why are the banks paying up when customers demand their penalty charges be refunded?

Bankers are not famous for handing out money on demand - certainly not to the tens of thousands of people they privately acknowledge have already reclaimed their penalties.

But talk to bankers or their trade association about what's going on, and you enter a Banker Wonderland.

For example, you might suggest to the banks, as I've been doing over the past couple months, that they're repaying penalty charges because they think they're on a legal loser and don't have a hope of defending themselves in court.

Not a bit of it, has come a bankers' chorus in reply. "Our charges are all completely legal".

So what's the reason bankers themselves give for paying up?

"We don't want to be in court with our customers" one banker tells me. "It doesn't make economic sense to fight such small actions." says another.

"We want to keep a good relationship with our customers - fighting in court wouldn't help that." says a third.

But these arguments don't answer a more a basic question.

Are penalty charges legal?

Imagine you were not talking about penalty charges, but overdraft interest instead.

It's easy to imagine the letter you'd get in return - polite banker-speak for "push off and forget it".

If you were mad enough to take your bank to court, you'd almost certainly end up with nothing but a lawyers' bill and egg on your face.

Why? Because however much you may resent the interest your bank charges on your overdraft, no-one challenges its legality so your bank is entitled to keep it.

But with penalty charges, the situation is very different. Penalty charges are widely challenged as unlawful by campaigners. The Office of Fair Trading is now scrutinising them as well.

Are banks charging fees or penalties?

Not surprisingly, banks are spending plenty of money on top lawyers trying to develop legal arguments to justify their charges.

The banks' latest line, revealed to us this month by their trade association, is that what everyone thinks of as penalty charges aren't, in fact, penalties at all - but fees for the service banks provide.

People may not like having their cheques or direct debits bounced, this argument goes, but it is all part of the service and that means it's legal.

How confident are banks in this new argument?

Well, if willingness to try it out to court is any guide, not very. Because in every case we have come across, banks have paid up rather than challenge a customer in court. And there's no sign that's changing.

Why don't banks go to court?

Which brings us to one final question for the banks.

If banks don't ever go to court to defend themselves against customers who ask for their penalties back, why do they tell customers that's precisely what they're going to do?

I suggested to the bankers' trade association that for banks to try to scare off customers by telling them they'd see them in court when they clearly had no intention of doing that amounted to little more than "bluff and lies".

The association thought the phrase was "pretty strong stuff" and "rather unnecessary" but, given that banks have never once defended themselves in court on this issue, it's hard to see what else it amounts to.

In November Walter Merricks, the chief financial ombudsman, effectively told the banks to put up or shut up: to prove their penalty charges are legal or pay customers' claims in full.

Perhaps the time has come for banks to stop bluffing and to turn up in court to defend their charges.

But with the legality of well over £10bn of charges in the balance, what would happen if they lost such a case is a question most bankers don't even want to think about.